Global Economics

New EU Growth Forecast Twice as Gloomy

A report released May 4 by the European Commission lowers estimated European Union GDP performance this year to minus 4%

A new economic forecast released by the European Commission on Monday (4 May) predicts EU growth will contract by 4 percent this year, a considerable downward revision from its January forecast of minus 2 percent growth.

Average unemployment is set to rise to 9.4 percent this year, while government deficits inside the 27-member union will average 6 percent of GDP, twice the figure allowed for euro area countries and used as a marker for the rest of the union.

Despite this, economy commissioner Joaquin Almunia sought to cast a more optimistic light over the new data.

"The outlook is still gloomy but for the first time since mid-2007 some positive signals have appeared over the last few weeks," he said. "We are no longer in freefall."

Improved business expectations within the EU and positive export data from Asia point to a stabilisation of Europe's economy in the second half of this year and a return to growth in 2010, he says.

But while other policy-makers have mirrored the EU economy chief's mild optimism in recent weeks, the extremity of the current situation is hard to avoid.

In 2008 the economies of seven EU states suffered an annual drop in GDP, yet this year the commission estimates that only Cyprus is set to enjoy positive growth.

Unemployment and budget deficits continue to rise

Faced with falling public demand, companies across the EU are currently cutting jobs and production levels as they struggle to stay alive.

As a result, only Luxembourg will see more people enter the workforce than leave this year according to the new data, with EU unemployment set to rise from 7 percent in 2008 to 9.4 percent in 2009.

Only 3.9 percent of the workforce is predicted to be out of a job in the Netherlands this year, while in Spain unemployment is set to average 17.3 percent.

Despite Mr. Almunia's comments on a return to growth next year, unemployment will continue to rise in 2010 as the need for new workers takes time to materialise.

In the meantime, falling tax receipts and the rising cost of social benefits and government stimulus packages are pushing member state budgets further into the red.

In March the commission initiated the first stage of excessive deficit procedures against France, Greece, Spain and Ireland due to 2008 budgets deficits exceeding 3 percent.

Hungary and the United Kingdom have already received commission guidelines under the procedure that can only result in fines for the 16 eurozone members.

Based on the commission's new data, Malta, Poland, Lithuania, Latvia and Romania will now also receive recommendations from the commission on how to tackle their budget deficits.

"We continue to enforce the Growth and Stability Pact, no doubt about it," said Mr. Almunia.

Speed of recovery

The ability of member states to deal with the crisis and the speed with which they will emerge from the recession will not be uniform across the EU.

"Everybody has been affected but not everybody has the same starting position to fight against the recession," said Mr. Almunia.

"Those who consolidated their public finances during the good times and those who have a better position from the point of view of their competitiveness are in a stronger position to define a successful exit strategy."

Both Spain and Ireland are likely to emerge more slowly from the recession than other EU states as their economies are currently going through a painful housing market correction.

While EU growth for 2010 is predicted to be minus 0.1 percent of GDP, growth figures for Ireland and Spain will be minus 2.6 and 1 percent respectively.

Other laggards include Latvia and Lithuania whose growth forecasts for 2010 are predicted at minus 3.2 and 4.7 respectively.